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This measure draws on the US 2002 Sarbanes-Oxley Act which put obligations on senior officers of US corporations to certify amongst other things that: they have established and are monitoring certain internal controls, and they have disclosed any material weaknesses in those controls to the company auditors.
That rang alarm bells in my mind, because the Act had a big impact on business in the United States and created some concern about whether the mooted takeover of the London stock exchange by the New York stock exchange would introduce extra-territorial regulationwhether Sarbanes-Oxley would apply here in the UK.
The issue reminded me of a debate that I had with the current Secretary of State for Children, Schools and Families when he was the Economic Secretary to the Treasury. On that occasion, we debated the Investment, Exchanges and Clearings Houses Bill, which was introduced as an attempt to avoid imposing extra-territoriality on UK businesses, triggered by concerns about the impact of Sarbanes-Oxley. I am therefore rather surprised that the Government have used that legislation to back up this measure, because, at the time, the right hon. Gentleman, referring to a conversation with Christopher Cox, the then chairman of the US Securities and Exchange Commission, and Hank Paulson, the then US Treasury Secretary, said:
I think that they both share my analysis of the current dangers of the Sarbanes-Oxley regime, which is that the way in which it has been implemented is both burdensome and insufficiently risk-based and that therefore it does not achieve the initial intention.[ Official Report, 28 November 2006; Vol. 453, c. 1039.]
I should have thought that somebody in the Treasury might have remembered that exchange when drawing up the regulatory impact assessment, because they then could have said that perhaps Sarbanes-Oxley was not the best precedent to cite. Indeed, I should have thought that the Chancellor might have remembered the precedent, because, in a 2007 speech to the Institute of Chartered Accountants, he discussed the reforms that were being introduced in the UK and compared them with the US, saying:
During a visit to the US last year, I was struck by the extent to which the approach taken by Sarbanes-Oxleyoverly burdensome and prescriptive ruleswas now seen as the wrong response.
I do not know whether the Financial Secretary shared the contents of the impact assessment with the Chancellor. If so, the Chancellor might then have remembered that he was quite sceptical about the benefits of Sarbanes-Oxley and the prescriptive rules that it imposed.
I was under the same pressure as US legislators to impose blanket proscriptions such as Sarbanes-Oxley. I resisted
in favour of maintaining a flexible principles-based approach. We will allow nothing to undermine that commitment.
The Government have argued before that measures inspired by Sarbanes-Oxley are overly burdensome and prescriptive, but the measure before us rings alarm bells: the Treasury has not learned the mistakes of Sarbanes-Oxley and seeks to impose its rules and approach to tax accounting. Interestingly, Deloitte and Touche, when commenting on Sarbanes-Oxley, also queries its relevance, saying that it is
questionable how relevant the Sarbanes-Oxley experience should be here as the US legislation was developed specifically in relation to financial reporting and so arguably does not extend to tax return preparation process.
has no impact on competition
Again, we return to the issue of consultation. The Government must understand the true cost to business. I am sure that Messrs. Sarbanes and Oxley, at the time of their Bills passage through Congress, said, Oh, dont worry, it will have no impact upon competition, it wont involve additional costs on business; that they were quite breezy about it, in the same way that the Financial Secretary is quite breezy about it in the impact assessment that he has signed off; and that, only when it was too late, did they realise that it had a cost and an impact on the USs competitive position. I just counsel caution.
The Treasury has rather rushed into the initiative, and it is not clear who its author is. I do not get the impression that HMRC has embraced it as warmly as it would if the initiative had been one of its own; and I do not know whether it was a follow-up to the G20 summit, whereby someone said, Something must be done, or a response to the TUCs campaign on the tax gapa political, knee-jerk reaction in the same way that Sarbanes-Oxley was to problems in the United States. It is not clear who is the father of this great idea.
Stewart Hosie (Dundee, East) (SNP):
Before the hon. Gentleman probes the genesis of the measure, I note that he talked about the costs for competitiveness. However,
there are real costs, too. Schedule 46 describes accounting arrangements, including arrangements for keeping accounting records, and many businesses will simply assume that that means that they need to get the most up-to-date and expensive enterprise accounting system. The hon. Gentleman will know that the real cost of delivering thatin monetary terms, consultancy fees and management timecan be quite enormous.
Mr. Hoban: The measure could be expensive, and that is part of the problem. No one knows quite how expensive it will be, because no one knows the detail of a measure that was published without consultation. We would have had a better idea of the cost if someone had bothered to ask business beforehand, rather than just slapping it into a Finance Bill as a cracking idea that might get a few cheers from Back Benchers, trade unionswhoever it was targeted atand saying, Well just finesse the detail later. That is not good enough, given the issues that this country already faces about the competitiveness of its tax regime, predictability, stability and certainty.
I am bemused by the clause, as are professional advisers and business. I am not even sure that we have a clear justification from the tax people. I talked about systems and materiality, and there are more than 20 taxes that could affect business. Does the clause apply to the accounting for each tax? Is it simply restricted to corporation tax, VAT, pay-as-you-earn and national insurancethe mainstream taxes? Or will business have to look at other taxes, too? I have not even discussed its impact on UK subsidiaries of overseas businesses or how somebody in the UK will get comfort on overseas subsidiaries, because the issue goes back to materiality.
Mr. Hoban: The hon. Gentleman looks like he is about to make a point, but I know from my experience of working with multinationals that an organisations control over, and knowledge of what is happening with, small overseas subsidiaries can be quite limited. It is down to risk and judgment.
Mr. Robinson: The hon. Gentleman asks who fathered the provision; I think that it probably has many fathers. In parts of, for example, Barclays, it seems that no one, including the finance director, knew what was going on, particularly in the separate overseas companies, many of which were seemingly set up for tax purposes. I do not know whether the Government intend to tackle that, but there is a real problem in making a chief finance officer sign off responsibility for the whole company. I understand from my right hon. Friend the Financial Secretary that we are targeting the very biggest companies. If it is the intention to make the chief finance officer responsible for what happens in all a companys operations, although it is necessary, we must think carefully about what we are doing.
The hon. Gentleman makes an important point about whom we are targeting and the level of control. I remember that the changes that corporate governance control measures introduced got people to examine some of their businesses in more detail. I am
conscious of his point about the very largest companies, but I am not sure whether we are considering only those companies. The regulatory impact assessment states:
Turnovermore than £22.8 million
Balance sheet totalmore than £11.4 million
Employees totalmore than 250.
The Financial Secretary to the Treasury (Mr. Stephen Timms): My hon. Friend the Member for Coventry, North-West (Mr. Robinson) drew on a brief conversation that we had earlier. I will say something specifically about the point that the hon. Member for Fareham (Mr. Hoban) raises, and about narrowing the scope of the provision when I catch the Chairmans eye.
Mr. Hoban: I am pleased that we seem to have forced a concession from the Financial Secretary. Again, it illustrates the point about ill-thought-through measures and lack of consultation. If the Government had thought matters through properly, the regulatory impact assessment would be better defined than it was when the Financial Secretary signed it off on 20 April. If he is already seeking to narrow the scope, is it a sign that things are coming apart? It demonstrates the weakness of the approach of rushing into something and having to unravel it afterwards.
We had the same experience in last years Finance Bill on the treatment of residence and domicile. The relevant provision was delayed till the end of consideration of the Bill to cope with a raft of further amendments on Report. We were assured that it was the last legislation on the matter, yetlo and beholdthis years Finance Bill includes more provisions on residence and domicile as a consequence of lack of consultation. I therefore believe that the Government are starting to retreat from their initial position as on 20 April.
Stewart Hosie: Let me reinforce the point that the hon. Member for Coventry, North-West (Mr. Robinson) made. I was with one public limited company, which had 140 units in the UK and one overseas, for five years. It would have been extraordinary if the finance director had been expected to spend half his time examining 139 units and the other half looking at one unit, simply to understand the one overseas operation.
Mr. Hoban: In a way, that goes back to risk and materiality. [Interruption. ] The hon. Member for Wolverhampton, South-West said from a sedentary position, The Bermudan subsidiary. That is not a reflection on the company for which the hon. Member for Dundee, East (Stewart Hosie) worked. It is interesting to ascertain what constitutes the gap that we are considering. Is it simply straightforward accounting for day-to-day transactions and the normal run of business, or are we looking at a layer of tax planning above day-to-day transactions? Are the Government targeting the latter? I am sure that any attached risks will emerge from HMRCs risk analysis procedures.
I have spoken for longer than I intended. I thought that I would make a brief contribution to the debate, but hon. Members have made many useful comments about how the provision will work in practice.
This proposed new requirement appears to impose further onerous obligations whilst adding nothing new in terms of tax compliance. The proposed measure is disproportionate because it applies a potentially onerous personal liability on all the senior accounting officers ab initio. HMRCs risk analysis procedures should identify the small number of large companies that do not have adequate accounting systems to prepare a correct and complete return. Rather than introduce this measure, if HMRC is concerned about internal accounting systems it would make more sense to extend the existing declaration that is required on the corporation tax return.
That is a balanced criticism of the provision, which has been hastily introduced with inadequate consultation. There are many grey areas, yet companies will be required to comply with it from an accounting period that starts the day after the Bill receives Royal Assent, without sight of draft secondary legislation. In the interests of maintaining industrys confidence in HMRC and ensuring that HMRC knows what it is doing, the reason for doing it and what the costs and benefits are, we should delay implementation until the first anniversary of the Bills passage.
Mr. Geoffrey Robinson: I want briefly to take up a few points in the light of that discussion. I shall start from the same point as the Conservative spokesman. Clearly, there must be a great deal of consultation on this provision, and it should not be implemented until the consultation has ironed out the bulk of the problems that are bound to be associated with it. However, I put it to the hon. Member for Fareham (Mr. Hoban) that if we consulted in detail on legislation like this before including it in a Bill, we would never get the Bill, because of the attitude of those who, understandably, do not want any form of additional regulation, bureaucratic control or paperwork, or any of the costs that the hon. Member for Dundee, East (Stewart Hosie) identified. We would never get there, so it is much more sensible to produce something first. HMRC is in touch with all companies accounting officers. It knows what it is after, and the companies do, tooand that knowledge is built into what is before us. It is not as though the provision had been plucked out of the airalthough it may sometimes suit the Opposition to suggest that that is the case.
The time to deal with the detail will be when the Bill goes into Committee upstairs. The companies meet HMRC in between the Committee sittingsthat is how it always happensand I am sure that the Government will be open to amendment, where appropriate. The hon. Member for Fareham makes a good case for consultation, which does happen, but he gets it the wrong way round if he thinks that we could have such detailed consultation before including anything in the Bill.
Mr. Robinson: There is no question of that. If the hon. Gentleman ever had to work with HMRC and companiesa remote possibilityI would urge him not to believe that he can undertake meaningful consultation before first producing something in a Finance Bill.
Rob Marris: Does my hon. Friend share my concern that in the body politic in the United Kingdom, wethis applies to all partieshave developed a regrettable tendency, which is that although we all say that discussion and debate are good, when someone changes their mind as a result of that debate, we claim that they are performing a U-turn, and that that change of mind proves that the original measure was ill thought out or rushed? That is regrettable, because that is what we do in this place: we share ideas here and discuss them, and occasionally people change their minds. That is an honourable thing to do.
Mr. Robinson: Indeed, it is not just honourable; it is the correct way to proceed. I used to start debates in Committee by saying, Look, this is for discussion and we are looking to get it right. If a point then came when the Minister made a sensible compromise or came to an agreementnot that that would necessarily happen, because in those days the Opposition had often not even tabled an amendment for the first sittingwe would hear, The Government are collapsing! A huge concession! Holes knocked in the legislation! That is not what Committee is about. I never had a problem with reaching for amendments, if that was the right thing to dothat is the whole purpose of the processproviding, of course, that they did not vitiate the essence or the purpose of the Bill. Indeed, if an amendment commends itself to the Minister, it should enhance the Bill.
I was interested in what the hon. Member for Fareham said about the law that was introduced in the United States in the wake of the Enron and WorldCom scandals, when the United States went in for what we called heavy regulation, which contrasted with what we over here called light-touch regulation, which I am sure the hon. Gentleman and the Financial Secretary will remember. I was not in the Treasury at the time, but I knew what was going on. We thought that that difference would give us a huge competitive edge, but it is interesting to see how things turned out.
That issue was meant to be about financial controls, but what went wrong with the banks was, in large part, to do with the lack of financial controls, albeit in a different sector now. Despite the heavy regulation in the United States, the problem started thereGillian Tett has shown that clearly in her book Fools Goldand then it spread, and we are clearly caught up in it. However, that regulation did no good for the sector that was about to blow up in the United States, whereas our light-touch regulation is now being blamed for what happened here.
What clearly went wrong was that people were not being intelligent about regulationthat is what it comes down toand neither were the central banks. Although we took away regulation from the Bank of England and gave it to the Financial Services Authority, the Bank still had an overall direct responsibility. I remember Eddie George saying, Im afraid of a systemic collapse, which is why he wanted that responsibility, and the money for it. That responsibility was clearly left with the Bank of England when we made that change. It is no good for the Bank to say, It was all passed over to the FSA. It was not: the integrity of the entire banking system was left clearly with the Bank.
Everybody was looking at the wrong thing, or not looking hard enough at the right thing. That is what happened in the United States. If we do not focus intelligently on the area that poses a threat to the economy, we will do no good, whatever sort of regulation we have, however many people we have and however many pieces of legislation we have to back it up.
Rob Marris: May I give my hon. Friend an example? The Canadian banking system has been far stronger than the banking systems in the USA or the United Kingdom. However, in Canada, under the Office of the Superintendent of Financial Institutions, there is less regulation. Banking is more heavily regulated in the USA, but the Canadians take a risk-based approach, on the basis that: We know risk when we smell it and well get in there. It is not just a question of regulation; it is a question of philosophy.
To return to clause 92, I am pleased that we are approaching the issue in the way that we are. I am sure that the Government will listen hard to what the industry says, and I am sure that we can get things right. As for why we are focusing on tax as we are, to me that does not pose the sort of problem that it seems to pose for the hon. Member for Fareham. In view of the multiplicity of taxation arrangements burgeoning throughout the world, I can quite understand the position of the United States Government under President Obama and that of the German and French Governments, who have always been strong on this issue, and why we have a particular focus in the UK on strengthening tax function and tax accountability; the words in the Bill speak of all this. It seems inevitable that that should be part of the review that we are having, when so much of the tax take appears to be disappearing overseas. I am not sure that that is directly linked, but I cannot help but feel that it is part of the mentality that has led to this part of the Bill.
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